Causes of Inflation
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- Опубліковано 21 вер 2024
- In the last video, we learned the quantity theory of money and its corresponding identity equation: M x V = P x Y
For a quick refresher:
•M is the money supply.
•V is the velocity of money.
•P is the price level.
•And Y is the real GDP.
In this video, we’re rewriting the equation slightly to divide both sides by Y and explore the causes behind inflation. What we discover is that a change in P has three possible causes - changes in M, V, or Y.
You probably know that prices can change a lot, even over a short period of time.
Y, or real GDP, tends to change rather slowly. Even a seemingly small jump or fall in Y, such as 10% in a year, would signal astonishing economic growth or a great depression. Y probably isn’t our usual culprit for inflation.
V, or the velocity of money, also tends to be rather stable for an economy. The average dollar in the United States has a velocity of about 7. That may fall or rise slightly, but not enough to influence prices.
That leaves us with M. Changes in the money supply are the driving factor behind inflation. Put simply, when more money chases the same amount of goods and services, prices must rise.
Can we put this theory to the test? Let’s look at some real-world examples and see if the quantity theory of money holds up.
In Peru in 1990, hyperinflation came into full swing. If we track the growth rate of the money supply to the growth rate of prices, we can see that they align almost perfectly on a graph with both clocking in around 6,000% that year.
If we plot the growth rates of the money supply along with the growth rates of prices for a many countries over a long stretch of time, we can see the same relationship.
We’ll wrap-up the causes of inflation with three principles to keep in mind as we continue exploring this topic:
•Money is neutral in the long run: a doubling of the money supply will eventually mean a doubling of the price level.
•“Inflation is always and everywhere a monetary phenomena.” - Milton Friedman
•Central banks have significant control over a nation’s money supply and inflation rate.
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I don't know how I found your channel but I'm very glad that I did.
Thanks, Vaibhav! Glad you're enjoying our videos. :) -Meg
if I could suggest a topic I would like to know more about the exceptions in 5:12 such as Indonesia, where the money growth rate is 40% and inflation is less than 20%.
same.. changed my life
Vaibhav Gupta you found this channel by its ad
Same thought. Thank you siir 💕
I must say this channel has the most harmonious comment section with awesome vids
I agree! We read every comment posted and we're grateful for all the feedback. It's amazing to see all the comments from people all over the world.
-Roman
Marginal Revolution University
That is one more reason to love you
This channel is churning out some brilliant videos recently.
Thank you!
-Roman
trigger warning for ppl who studied greek: they say "a phenomena"
best channel ever tho for learning the intuition of economics! u are heroes!
"10% is a great depression" - Laughs in 2020
laughs in argentinian
I subscribed immediately after I had seen this useful and interesting video. It's really easy to understand helps me a lot with my macroeconomics course. Thank you very much!
The first day, the first video I saw in this channel. I subscribed before completing the video. It is simply what I expected. You are doing great job. Thanks alot.
This channel saved me, from failing eco 240 at university.
I wish you guys took donations.
I believe the Mercatus Center, which they are affiliated to, takes donations.
It's so nostalgic recall the first economics classes
I think this is really interesting in terms of how M, V, P and Y are defined. So correct me if I'm wrong but here's how I'm thinking about it.
If the amount of money (M) increases, the value of the dollar decreases so prices must go up.
If the velocity of money (V) increases, that means more people are buying, thus increasing demand and according to supply and demand theory, the demand line moves to the right thus increasing the price.
If the number of products (Y) decreases, the value actually goes up because it becomes rarer (and assuming that people want it), the price will increase. (Think luxury cars and really rare trading cards)
My understanding is Y is GDP and it goes up, cetris paribus, there will be deflation. Is that right. Economies with more demand have deflation???? It seems a little counter intuitive and counter reality doesn't it?
My understanding is also the same as yours
@@EightToneSpanish Y isnt the GDP
GDP comes from the
M x V or P x Y
according to their own video : ua-cam.com/video/q59tZKP0HME/v-deo.html
Your videos have been an extremely helpful resource for studying for my macroeconomics final. Thank you very much.
Very good channel. It helped me to get a 28/30 in my macroeconomics exam.
Kindly explain Milton Friedman Theory as well, You have made it so easy Great Channel for Economics
Great content! Thanks for making the economic principle quantifiable. It ties in perfectly to the previous lessons. I enjoy these weekly videos.
thank you so much !!! the examples of Peru helped my research significantly!! keep up the good work! so easy to understand eventho I'm not an english native speaker.
Thank you for all these great videos. It is amazing how you explain all these things in such less time.
This is addictive. 👍
You are such much better than my actual teacher. Thank you!!
Thanks for making these concepts seem simple with the animations, sound effects and word choice!!
Thank you for your videos, they are very educative. However I must point out something, in 5:21 the line drawn on the graph is not correct. That's not a good fitting of the observed data. If you would fit a line, the line that best fits would somewhat have half of the data points above it and half below it. That would remain a linear fit, but not "perfectly linear" that would indicate that the primary cause of inflation is money supply but doesn't account perfectly for all the inflation.
A very informative video, thank you!
What exactly do you mean by Money Supply?
This is a good video in many respects, yet ultimately it constitutes bad pedagogy because it does not mention, let alone consider rival theories of inflation. For example, most Post Keynesians would argue that inflation usually starts with an increase in P and this cause M to increase in response. In other words, the causation of inflation is the opposite to that argued for in this video. The Post Keynesian theory is realistic For example, a wage-price spiral is an obvious example of price increases being generated via distributional conflict. Furthermore, a government and its reserve bank have trouble measuring the money supply let alone controlling it tightly and its entirely reasonable to argue the M could expand in response to P.
Is there empirical evidence that supports the Post Kenynesian's theory of inflation?
Thanks for your reply. Yes, there is good empirical evidence that inflation can (and does) run from P to M (rather than from M to P). However, let me start with the basic theoretical logic. A Post Keynesian view rests of inflation rests on the idea that the money supply is endogenous (as opposed to the essentially monetarist view of inflation in the video above, which assumes an exogenous money supply - i.e. that the money supply equals the money multiplier times the monetary base. Since the central bank can change this base, it is assumed that the bank can control the supply of money in the economy = exogenous money). Once it is realised the money supply is actually endogenous then it much easier to grasp how the money supply is accommodative of (rather than determinative of) a rise in prices. The pressures for such a rise have multiple origins, for example a wage-price spiral. In terms of evidence, see analysis of panel data from 177 countries in Nayan, S, Kadir, N, Abdullah, MS & Ahmad, M 2013, 'Post Keynesian Endogeneity of Money Supply: Panel Evidence', Procedia Economics and Finance, vol. 7, pp. 48-54. See King J (2015) An Advanced Introduction to Post Keynesian Economics, and its bibliography, for both further theory and evidence on this point (and many other important points in macroeconomics and finance). Also, see the Bank of England's debunking of the confused view of money that is still being served up to students around the world/ ua-cam.com/video/CvRAqR2pAgw/v-deo.html
@@tbthornton5305 Thank you. I'll definitely check out those sources. I noticed that those papers and videos were from 2013-2015. Has the Post Keynesian's model for inflation done a good job of explaining the recent surge we are seeing in the US and UK? Our current situation should be a good test as to whether that updated model is any good.
Anyone spotted out this channel when ur final exams are held on the next day ? 😂 and I regret it now why I didn’t I look into this channel earlier 😂
most underrated channel
Really great content! u helped me a lot .thank you so much .
This is just so well-explained!!! Thank you profs!!!
thanks for all the help, the way you guys put it make it easy to understand economics. (i'm surprised there aren't more views)
You misquoted Friedman. He actually said: “Inflation is always and everywhere a monetary *phenomenon*" (not "phenomena", which is the plural form, and obviously unsuitable in that context).
how you determine that causality? countries can print more money to pay their internal debts that had been affected by inflation
I'm crying now. Literally.
Great video. I'm study the university, and about this video, i want to know how many theories explain the inflation. quantity theory is one of them, now i know. thank you for this amazing source of knowledge. :D
Good video 🎉
It's the increase in prices that cause the increase in the money supply, not the other way around. Prices reflect our demand for money. Prices increase because we demand more money, and the more money we have, the more money we demand. Because when having money is no longer about survival, it becomes all about status, which makes people insecure, causing people to desire more money. The solution is to recognize that if goods are easily made plentiful, then it barely cost us any resources and labor to provide for each other, so the prices should reflect that...free.
Population growth means higher demand for a fixed amount of goods and services, which is also inflationary
As Argentinian, can confirm
Japan has deflation for years and money supply growth beyond limits. This theory has an issue. Also saying that the velocity is more or less stable is at least something to debate about. In US M2 is goes up, I see no signs of inflation. The velocity drops to record low levels because it does not go to main street but to wallstreet. Same here in the EU.
What should be said too is about money allocation. When money are allocated to financial market and real state the price of stocks, houses and bonds skyrocket and bubble are caused but they do not make part of official inflation index. How convenient for use of QE money, for exemple. And how convenient for speculation and distortion of values of society. Price affects V and M affects Y. Therefore manipulating P and M manipulates V and Y.
The manipulation of P and M are easily done in open society. As in free market theory, the two factors dictates the direction of price as in stock and commodities exchange i.e. , greed and fear. Causing greed and fear in the economic society obtain change in Velocity by causing significant change in price. In panic of deflation, V slows down much quickly and deeply than the impact when comes the greed of inflation and V speeds up. Therefore, by using manipulation on M can obtain manipulation of V and both mutually manipulate P and vice versa.
So what if we restricted the money supply and made it static, unable to change? Would that eliminate inflation?
@Ale Ah okay. But didn't Bitcoin turn into a bubble and then collapse?
I am from india..ur every videos are very helpful
Hey Professors, reporting for class.
Greattttt
Wow good presentation sir thank you
this video should we shown in schools and universities in argentina
These are insanely good videos
If inflation is directly affected by money supply, would stoping production of new money solve it?
I hope somebody can answer, I just want to understand the concept of inflation.
I live in the Philippines and the news says that inflation is at 6.4% it's highest for almost a decade.
I know that this means higher prices, but what could've caused this? And what the government did or didn't do to end up with this.
(I think one recently passed law may have contributed but I'm not sure).
Tabarrok lies at 2:39 when he turns an accountant identity (MV=PQ) into a causal relation. Prices may go up due to an external supply shock, for instance, like bad crops or oil price rise. Surely, monetary supply must accommodate for the inflation to take place without collapsing the economy but it is not the rise in M but the rise in basic or import prices that ultimately causes the rise in prices; additional money supply is in this case but a coadjuvant factor. He's trying to cheat also at 5:45 when he states that in the long run money supply is neutral. What about additional money supply decreasing interest rates, hence increasing investment, GDP, employment and capital stock? Tabarrok is just conveying another neoliberal fallacy: he's assuming that Y, the real output, stays unchanged, which need not be the case at all. The ill-defined expression "in the long run" is used to conceal the function of monetary policy in order to take the economy to the full-employment GDP.
American Monetary Policy debunks Quantity of Money Theory because we increase the money supply every year we don't experience high levels of inflation.
Nobody is turning an accounting identity into causal relations, you idiot. At the beginning of the video he even said that there are three possibile causes of inflation: M, Y or V. He also said that the equation by itself is insufficient to explain the causal relations and this is exactly why one has to make empirical and/or logical assumptions to get a working theory of inflation. Also, if you deny the existence of the short-run and the long-run you show yourself to be a complete ignorant of macroecon 101. In the short-run the prices of resources stay the same, in the long-run they don't because you cannot expect inflation not to have its effects on costs of production. You are full of crap.
@@adrianomattia5625 I read until "you idiot" and wasn't convinced ;)
@@LaureanoLuna Then you just showed yourself for what you really are, a self-righteous and pretentious prick who doesn't feel like listening to other people's position. If you just read the rest of my comment you would have been faced by the possibility of being challenged and you don't like that, don't you? ;)
I took this as an introduction to the concept. Simplified for people like me to make it easier to understand.
so maybe this is another "relatively flat" factor, but doesn't supply of products also matter? like that's basic supply and demand what am I missing here?
Can anyone explain why inflation keeps rising? Shouldn’t it stop once total spending matches the total money supply? How can consumers keep bidding up the average price of goods if every dollar has been allocated?
Brilliant video. Very interesting. Thank you so much! My exam is coming. Wish me luck haha
what about over spending and wealth?
Assuming the initial equation is indeed an identity, then we are left with an equality relating two variables, P and M, as we don’t know anything outside of P being called “prices” and M being called “ money”, we only now that when one moves, the other follows. If we assume that money is set first, say by the central bank, then it should follow that the price moves accordingly. But, if we assume prices are set first, then it could be that the central bank reacts accordingly by providing the necessary money. If we don’t make one of these explanations before presenting the equation, the equation has no power of explaining the process. The explanation must be presented before the equation, and the equation is a result of the explanation, not the other way around.
Thank you for all the good videos!
great one. But velocity of money is an important fact lately. Japan, USA and EU are increasing the M but P is not growing because commercial banks are not "sharing" the money, so the V became a matter of fact. am I wrong?
Stay tuned! I had the exact same question and confusion when I saw M graphs from 2008 and no big jump in P. We will get into this when we dive more into the fed and monetary policy. But you are correct that the mechanism is not so straightforward now, but once you see the details the quantity theory still makes sense. FYI, after this inflation section we've got biz cycles and then fed/monetary policy.
-Roman
Great! :) I don't know USA that much. Gonna explain my idea: In EU (specially Italy, my country), the problem seems to be that yes, M is growing, but not in real economy. Commercial banks are keeping the QE M money as reserves (although negative interest rates) and not loan families, companies etc.
So, M growth is just "theory". In real world we don't have it because V is very very low. I could say that in Italy we had zombie banks that have loaned zombie little companies. Now they are just loaning them because they can't mmmh...right off the non performing loans and keep going with the zombie landing (same that happened in Japan). Because of it, they stopped the landing for others.
What do u think about it?
PS: im not english and not use it in the econ world that much ahah hope my message is "understandable"
I haven't studied Italy much but the story sounds somewhat similar to what happened in the US. In the US, the Fed began paying interest on reserves, which changed the banks behavior. Typically banks will hold reserves close to the minimum reserve requirement. After interest was being paid, they held far more, meaning that while money was being created, it wasn't being circulated. Whether you say that behavior is V decreasing or not depends on how you measure M. In some measures of M, reserves don't count, so if the money stays in reserve M doesn't budge.
-Roman
Marginal Revolution University hi, i have a question: does Y(real gdp) counts for unsold products too?
Alex Lex because real GDP is productivity?
very informative video. Thank you. Just wandering what would happen when US Federal announce unlimited QE (printing money) to stimulate the economic
Brilliant video!! Very well explained!
Awesome video, great information thanks!!!!
Great place for economics
an increase in the money supply is not caused just by printing money by the Central Bank.
It can also increase when commercial banks issue too much credits and debt. Or when immigrants/tourists bring money from other countries.
1 question: the government is responsible for printing more currency but the inflation can only ocurr when it is actually affecting the country right? My doubt is what actually happens since the increase of money supply and the actual inflation
Great video. However, not sure you can always assume Y is long term stable. What about exponential growth driven by tech, like in consumer electronics? This actually causes deflation in terms of bang for the buck. And this is a long term trend. Really extraordinary in the face of government programmed growth in the money supply and expanding credit.
The idea is that Y doesn't fluctuate dramatically in the short term. Over longer periods a steady growth rate can mean big changes in Y, and yes, if M doesn't keep up, you can see deflation. Larry White brings this up a bit when he discusses the 19th century gold standard in this Econ Duel: ua-cam.com/video/FbDZ0ObRXfE/v-deo.html&list=PL-uRhZ_p-BM5B-q4URjHtVKY0hekfExEx&index=6
-Roman
Great video!
Agreed. I would have liked it if, as with GDP, they had plotted the money velocity over time as well, just to see if it really is as flat as is implied.
So the United States is going to see 40-100 % increase in prices. Dark times ahead indeed.
No, his explanation is faulty. Read the Fed notes directly.
What if money supply is increasing but the money doesn't get spent on final goods but goes into asset markets, stocks, bonds, real estate. I don't think this equation captures inflation in assets.
What if prices rise because of rising price on commodities,caused by lower supply of commodity.Isn’t that non-monetary changes in price?
what a great video, but why there is no inflation after printing so much money by the Central bank?
In the equation GDP = C+I+G+(X-M), does investment 'I' includes inflow of Foriegn direct investment (FDI) ?
Does investment 'I' includes spending by domestic businesses only?
Does investment 'I' includes spending by foreign businesses in the form of Foreign direct investment (FDI) ?
No, as far as I know, "I" in this equation only refers to spending by domestic firms on physical capital investment
Hello, if we are evaluating "large and sustained changes in price levels" (i.e. we are looking at the long run?), shouldn't it mean that we can consider Y and v as variable ? Since you are also acknowledging that real GDP and velocity of money don't change in the short run, but they do in the long run?
That is soooo much helpful !
People seem to underestimate the velocity change during covid.
Hi, I am a bit confused!What do you mean by term "flow of money"?Profit company makes or transactions in cash?
So what you are saying that inflation is primarily caused by an increase in the money supply.
great vedios!!!!!!
you say "In the long run, a doubling of money supply leads to a doubling of prices" but in the long run isn't Y (PRODUCTION OF GOODS AND SERVICES) also changing ?
amazing content
Amazing!!!
Thank you sir
Coronavirus lockdown, is velocity still constant?
what if there are more than three causes that can be identified? What about outside influences such as tsunami in bread baskets of world or every oil cargo sank
All to prevent the buble from bursting but its just a matter of time. Order > chaos.
is velocity of money related to the marginal propensity to consume?
I see, demand (V) and supply (Y) are low during recessions. So that's why they have to pump cash to inflate and stimulate demand and supply again.
I would like to see some comments on USA's huge increase of its monetary base but no big changes in inflation after the 2009 crisis. I remember reading somewhere that it was because of the low velocity of money. Was it? Does this theory explain that?
It's a great observation. We are going to cover that when we get to Monetary Policy.
-Roman
Lets be honest. Inflation is the masses of people having more to spend on products. As long as the rich just keep getting richer inflation is not a problem, its when the poor or average consumers increase's the demand.
Imagine an economy where there is only 1 product.
_There are only 2 humans in Earth..._
Day 1: Socratis produced one apple. 🍎
Day 2: There are just $10 in the economy.
The only thing Plato can buy is the apple. Hence, if Plato wants, the apple will cost $10.
Day 3: Plato decided to print more $90.
Plato has $100.
The only thing Plato can buy is the apple. Hence, if Plato wants, the apple costs $100.
In the past, $100 could buy 10 apples. But there were no more apples in the economy, so the value of that $100 decreased 10 times.
Hello there MRU,
Do you guys have step by step I vids like I'm a very beginner and have to from start so I am quite lost lol
Is this comment even understandable? : p
Aditya Mathur they actually do just check out their channel or go their website MRuniversity.com. I was confused and found their site-it helped me 😊. Good luck!
pow Thank you so much bro!
Hi Aditya,
I'd suggest starting with Micro and then doing Macro. Or, if you're more interested in Macro topics, if you start from the beginning of the course or this playlist, that will give you a good starting point: ua-cam.com/play/PL-uRhZ_p-BM52EbMG1NR1ZfG9tEvcxE4u.html
-Roman
Marginal Revolution University Thank you👌👍💓
The fallacy with this video series on Economic Theory is that it ignores the effect of extreme economic (and political) inequality. The argument that price inflation leads to wage inflation is completely false, at least for those paid a minimum wage. The $7.25/hr minimum wage is the same today as in 2009, even as corporate profits have soared, and as fewer people now work full time or receive healthcare and retirement benefits. For those people living paycheck to paycheck, the speed of money is very fast, as they tend to spend it as fast as they get it. But for those with means, the speed of money is far slower, because they can afford to sit on it or invest it. So, with that perspective, this entire series seems to have been created by the wealthiest 1% to spread disinformation and nudge policy in the directions they prefer.
very useful
So I guess now in US more money is printed but went to financial markets instead of leading to higher inflation rate...
Why every countries should have reserved us dollar back up, thanks
Can you explain same theory about INDIA
"A change of 10% down in GDP would be unusual and like a great depression." Marginal revolution, may I introduce you to the coronavirus economy.
What about countries with high inflation but stagnant salaries? Where does all this extra money go that's being printed?
.
I live in Ukraine w about 25% inflation and salaries move at 0-5% per yr
what if M is constant? like in bitcoin.
if v and y is relatively constant in long run, and M is made to be constant, then P is also constant?
Yes - given that Y also typically is growing, you could have a mild deflation in M is relatively constant. When the US was on the gold standard M and Y grew at similar rates, so that you had near zero inflation or periods of mild deflation. That, as well as the problems with the gold standard, are discussed in this Econ Duel: ua-cam.com/video/FbDZ0ObRXfE/v-deo.html
-Roman
Marginal Revolution University
You’re only looking at half the story with the gold standard. When we would purchase goods from other countries, Y would grow, and then M would decrease to cool off the economy, and in turn that would enrich the country we were trading with and everything would balance out in the end. Mild deflation is a small price to pay to keep governments from deficit spending.
The Velocity of M1 Money supply has ranged from 4 to as high as 10.5 since the 1960's,
and ranged around 6-7 between 1975-1996.
The % effect it has on prices is related to its magnitude:
Let
r = incremental change in v
n = current value of v
then the percent change is:
(n+r)/n = 1+(r/n)
so a .5pt change at v = 6 represents a (.5/6) = 8% change in Price
at v = 7 that is a 7% change in price
Even at a v = 10 that .5 pt change is still a 5% Price increase.
The velocity of money is NOT a negligible factor in Price value.
However The M1 Money Supply went up from .273T to 1.4T between 1975-2008 a 5.1x multiple
which is a 5% APR.
Between 2008 to Present the M1 Money Supply went from 1.4T to 3.66T a 2.6x multiple
which is a 10%APR
The Difference is that Money supply has a long term and permanent effect on Price because it is rarely lowered by
a significant amount and not at all over the long term.
Money Velocity does have a much higher variance.
fred.stlouisfed.org/series/M1V
fred.stlouisfed.org/series/M1
Why can't the price of commodities just stay the same despite an increase in money supply?
Does anyone understand?
What would go wrong if the prices do not change even though money supply has been increased?
Because money is supposed to be valuable. What gives something value is scarcity, which is why the gold standard of the 1800s kept prices very low. If there are trillions of dollars in circulation then money isn’t as scarce, so it’s less valuable.
"a monetary phenomena" is wrong. 'Phenomenon' is singular, and 'phenomena' is plural.
Lol I noticed that too.
GOD BLESS. UNSOPHISTICATED WITH A SOLE INTENTION OF IMPARTING KNOWLEDGE
Thanks for the video, its really easy to understand. I feel like the image of the woman shopper is unnecessarily sexist though :/
May I ask where the number 7 for V came from?
I looked it up and found it is closer to 2
fred.stlouisfed.org/series/MZMV
Also if Y increases and we assume that M&v stay the same then that will lead to P falling. i.e. the deflation. Is this really true? An economy grows the price level falls. That seems to contradict logic.
Any thoughts would be most greatly welcomed.
Why Japan has been in recession for 30 years no matter how they change their interest rate or exchange rate? They don't have hyperinflation but they don't have growth either.
So when M dropped why is it still considered a luxury to eat a banana there .